Could SOE reform in China usher in the next economic revolution?

President Xi Jinping (習近平) recently called for strengthening and improving Communist Party leadership within state-owned enterprises, at a national meeting for SOE leaders.

Xi’s speech drew plenty of attention, especially since SOE reform has lagged for longer than expected. Xi also sent out a strong message that SOEs must deepen their reforms in order to “become important forces to implement the decisions of the party”.

Some SOEs, given their abundant financial resources and power, have the tendency to become independent “empires”. As such, they might influence or even eventually reshape China’s political landscape, resulting in a widening of the income gap. The worst-case scenario is that the country’s economy and politics might be controlled by these oligopolies.

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Since President Xi and Premier Li Keqiang ( 李克強 ) took up their leadership roles in 2013, the government has undertaken a number of reform initiatives. In comparison, SOEs have moved relatively slowly, even though the third plenary session of the 18th Party Central Committee prepared a very ambitious blueprint. In June, the Central Leading Group for Inspection Work complained to the State-owned Assets Supervision and Administration Commission (Sasac) that expectations for SOE reform had not been met and called for the commission to speed up the reforms.

Liu He, top economic advisor to Xi, recently urged the implementation of a pilot reform programme for mixed ownership among some strategic and mostly SOE-denominated industry sectors, such as electric power, petroleum, natural gas, railways, civil aviation, telecommunications, and even defence.

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These sectors are often regarded as having a significant influence on the livelihood and economic security of the public. They have in the past also been described as “untouchable”, as far as alternative ownership models were concerned, so choosing these vital areas illustrates the determination and confidence of the central government in promoting reforms.

The reforms aim to open up competition among these businesses in order to break their administrative and market monopolies. Along with this, better governance, stronger incentive systems, increased focus on main businesses, and improved efficiency are the major objectives of the pilot reform programme.

After 38 years of reform and opening up, China is making the transition to a more modern and consumption-driven economy, which is the main cause of the overall economic slowdown. There is a tricky balance between how fast the economy should grow and the need to respond to other pressures, such as those related to jobs and a better quality of life.

SOE reform might be the next major breakthrough or “economic revolution”. Unleashing their hidden vitality and improving their efficiency would serve as a focal point to ease the economic downturn, and would also transform China into a more advanced economy.

According to Sasac, for the first half of this year, gross revenues of central and local SOEs (excluding financial companies) reached 21.39 trillion yuan (HK$24.23 trillion), or more than 60 per cent of the national GDP.

Furthermore, for the first three quarters, though private investment accounted for 61.4 per cent of total fixed-asset investment, the growth rate remained at only 2.5 per cent. In contrast, as a result of government stimulus, state-owned investment increased 21.1 per cent. If private enterprises were treated with similar preferential policies, and also had access to sectors controlled by SOEs, this might not be the case. Besides, outbound investment by private companies has almost tripled so far in 2016.

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It is important to point out that private enterprises currently dominate China’s international trade picture. But SOEs are usually much larger and have far more resources. For example, of the more than 100 Chinese companies on the Fortune Global 500 list, only a handful are privately owned.

Thus, once SOE reforms have been launched in the proper way, China’s economy will continue to thrive and flourish for at least another two to three decades. What will the Middle Kingdom’s prosperity look like then? It cannot even be imagined.

G. Bin Zhao is senior economist at PricewaterhouseCoopers China. The opinions expressed here are the author’s own